Chapter 3: Supply and Demand I. Markets and Prices a. A market is any arrangement that enables buyers and sellers to get information and to do business with each other b. Markets have two sides: buyers and sellers b.i. Markets for goods, services, resources, and manufactured inputs c. Most markets are unorganized collections of buyers and sellers d. Competitive market-a market that has many buyers and sellers, so no single buyer or seller can influence the price e. Money price-the number of dollars that must be given up in exchange for an object f. Relative price-ratio of one price to another, is also an opportunity cost f.i. Divide the money price of a good by the money price of a basket of all goods (price index)—tells us the opportunity cost of the good in terms of how much of the basket we must give up to buy it g. Demand g.i. If you demand something then: you want it, can afford, and plan to buy it g.ii. Reflects a decision about which wants to satisfy g.iii. Quantity demand-the amount that consumers plan to buy during a given time period at a particular price, not necessarily the same as quantity actually bought g.iv. Measure as an amount per unit of time g.v. Law of Demand g.v.1. Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded g.v.2. Higher price reduces quantity demand because of substitution effect, and income effect g.v.3. Substitution Effect g.v.3.a. As opportunity cost of good rises, incentive to economize on its use and switch to substitute becomes stronger g.v.4. Income Effect g.v.4.a. Faced with higher prices and unchanged income, people can’t afford to buy all things they use to buy g.v.4.b. Must decrease quantities demanded of some goods/services—good/service whose price increased g.vi. Demand Curve and Demand Schedule g.vi.1. Demand-refers to the entire relationship between price and quantity demanded of a good g.vi.1.a. Illustrated by demand curve and schedule g.vi.2. Quantity demanded refers to a point on demand curve— quantity demanded at particular price g.vi.3. Demand curve-shows relationship between quantity demanded of a good and good’s price when all other influences remain same

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g.vi.4. Demand schedule lists the quantities demanded at each price when all other influences on consumer’s planned purchases remain same g.vi.4.a. Quantity demanded on x-axis, and price on y-axis g.vi.5. Willingness and Ability to Pay g.vi.5.a. Measured by marginal benefit

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